Pay no attention to the inflation behind the curtain.
That Wizard of Oz dictum is how I would describe why this stock market rallied Wednesday, and you know what, I think unlike the movie version, Fed Chief Jay Powell, who triggered the rally with his decision to keep interest rates lower longer despite signs that the economy has turned, may be dead right. We shouldn't pay attention to inflation.
It's too early.
And there are more important dishes to fry. Like helping the poor, the underclass, the people whose lives have been torn asunder by the pandemic and aren't able to turn their lives around because of the horrors of COVID-19 and what it has done to the economy.
Now, I have been adamant that if you fancy yourself a stock picker and do nothing but take your cue from what the bond market says, which is the way the old fashioned fund managers look at stocks, you are going to miss out on some big moves.
If you, instead, recognize that the Fed is the stock market's friend, you will catch them.
Man, Powell is such a hitter. He is relentless in his desire to help the underclass in this country. More than anyone. It's truly incredible... and joyous!— Jim Cramer (@jimcramer) March 17, 2021
More important, if you pay no attention to the Fed or the bond market, which is pretty much the status of the newer investors, and you buy every dip, you can make out like a bandit, as anyone who bought stocks at the low Wednesday knows all too well. Those of us who have been around forever don't like it, but ignorance is bliss and more profitable than intelligence. Sorry.
I want to talk about all three groups and their reaction to the Fed's decision to keep rates low and worry more about the people in this country who have no jobs, particularly, as Powell said many times, African Americans and Hispanics, rather than focus on the fact that there are areas of this economy that are running red hot.
First, there are these judgmental, usually very rich, baby boomers, who dominate Wall Street, the ones who run giant pools of money. They grew up in a period of elevated inflation that really eroded purchasing power. They see it happening again. They look to the Fed for help in tamping inflation. These people are, for the most part, hailed as wealthy white fat cats, by Gen X, Y, Z and whatever comes next in the alphabet, something they probably know, but we don't.
Then there is a second group, the one that agrees with Jay, that inflation really is transient, so why not let the economy continue to gain strength, so that everyone has a chance to do well, not just the rich white people, even if is means that the latter does really well. The collateral damage of trying to give the poor working and non working classes some opportunity is that the rich do get richer. That's a high quality Powell problem.
And then there is the third group, the group that's getting big stimulus checks this week and just found out they don't need to pay their taxes until May. These people have no idea what Powell says, what the bond market says, or even what I am saying, and they don't even care. They just want to make money and when they see stocks down and it's because of the bond market or inflation, they dismiss it as some sort of baby boomer's stupid pre-Amazon (AMZN) , pre-Google (GOOGL) , pre-Apple (AAPL) , pre-Microsoft (MSFT) , pre-Tesla (TSLA) way of looking at things.
They don't even want to know that when bonds go down, rates go up. They might even think that when bonds go down, rates go down. Like, who cares, throw me the diamond hands and "you only live once" -- YOLO! -- losers.
Which is the "Truth," if you care about it?
When I say that we have to pay no attention to the inflation boogieman behind the curtain, I am saying that this boomer group sees inflation everywhere and they have a point. These big money pullers, especially the hedge funds among them, think that Jay Powell is deliberately trying to ignore inflation, because he isn't the traditional hard money Fed Chair, he's a bleeding heart liberal who, somehow, got appointed by a former president who made fun of him mercilessly for not doing enough to help the economy, when he has probably done than most of any Fed chief I can ever recall.
Where is the inflation? OK, on any given day you hear about it. Last night we heard from Dow Chemical (DOW) about how lots of chemical plants were shutdown by the big storm Uri in Texas and Louisiana and that's taking up the prices of pretty much every form of plastic. The price increases are insane and they are sticking. There is tremendous demand in the copper and aluminum sectors, the latter is finally moving up after years of dormancy. Lumber has doubled, and lumber's the biggest cost of new housing besides labor, which is also going up quickly. Lennar (LEN) reported a barn burner of a quarter on Wednesday, because it can charge more for houses and the prices are sticking.
We see price increases where airlines are packing them in. We see steel increases one after another. We see semiconductor prices soaring, because of chip shortages all over the place. There is a level of demand never before seen and it is not going down any time soon. The result? Cars and trucks cost more and the scarcity of both is driving up prices. Oh, and don't get me started about oil.
How crazy is the level of inflation? We got an upgrade Wednesday of Hershey (HSY) , the candy company, and the most important reason for the upgrade? Unlike every other important food stuff commodity, the price of cocoa is not increasing.
Maybe Jay Powell is paying attention to the cocoa behind the curtain? Hershey's Kisses anyone?
This group of people is so angry at Powell that they like to sell stocks in spite of him. They dump and dump any growth stock and they pile into companies that are capable of raising prices, anything that makes or bends or twists or spindles a commodity.
The bottlenecks will clear and a year from now we won't be talking about inflation, we will be talking about strong economic data and maybe even lower unemployment for Blacks and Hispanics.
The second group, where I reside? The first group wants to wear silly buttons that say "whip inflation now." The second group wants a pin that says, "I'm with Jay," because they think that if we gave it some time, these prices will come down. The bottlenecks will clear and a year from now we won't be talking about inflation, we will be talking about strong economic data and maybe even lower unemployment for Blacks and Hispanics. More might be able to get jobs in service industries that have been decimated by COVID. Why not? Most of these people had jobs a year ago. What the heck? Why not get everybody vaccinated and get those jobs back and then worry about things?
Those used to be the only two groups out there. But now there is the third, the 17 million people who do business at Robinhood, the millions who use Square's (SQ) cash app, or trade commission free all over the place, and bank with E*Ttrade (MS) and Ameritrade and Schwab (SCHW) . These millions of people are taking those stimulus checks and after allocating a decent chunk to March Madness bracketology, buy stocks, growth stocks, any stocks. And they buy them with gusto,
They didn't know that Powell spoke. They may not even know who Jay is. They don't get that stocks have historically keyed off of bonds. Here's what they do know: You make no money in bonds, you make no money in cash, you make big money in stocks. You have ever since the bottom a year ago next week.
They are the ones who support stocks. They are the ones who can't be bothered with the baby boomers' obsession with inflation. They are the ones who wish the baby boomers would just go away.
So where does that leave us? You have three cohorts. The one that is leaving the stage kicking and screaming who can't believe that the Wizard of Oz is the Fed chief, the one that says "In Jay we trust," and the third, who says, "Who's Jay, heck, who is the Wizard of Oz, let's go buy some Tesla and send Hot Hand Cathie Wood, the best fund manager of our moment, and give her our stimulus checks." Two out of three like stocks here and in the end, that's why stocks rallied instead of going down as they might have when the boomers were still in charge.